Karthik Krishnamurthy and Dharam Jumani
Introduction
The world never expected a virus disrupting global economies the way it has in 2020. China, the manufacturing hub of the world was first disrupted due to the virus. There has been disruption ever since affecting the global community.
Countries and their neighbours had to close their borders and world trade has come to a near standstill. This effect has been felt across all industries from electronics to pharmaceuticals. The supply chain has been disrupted across all industries. When lockdowns are necessary to keep a check on the virus spread and social distancing is the only way to reduce the spread of the virus, the common man has been facing issues getting daily essentials – milk and bread from the local retail store where the shelves of products are empty.
Supply Chain Disruptions – What’s the Plan?
Every time there is a disruption, companies scramble to see that the disruption affects them the least. This brings up the instance when a factory in Mexico had a fire. They were producing chips for Nokia and Ericsson. Nokia moved their production elsewhere and Ericsson lost market share as they were not able to adapt quickly to the change. This highlights the need for Risk Management in supply chains.
A lot of companies have planned for this kind of an event and have adapted quickly reducing the overall disruption. Consulting and IT companies have enabled work from home for their employees by setting up and moving to cloud based networks and enabling client needed business continuity planning (BCP) strategies.
Manufacturing has to be more local, governments need to support local production to reduce global dependence on places where talent is relatively easy to obtain and economically viable. Suppliers need to more tightly integrated and the relationship needs to be more collaborative than transactional. Companies are now leveraging newer technologies like 3D printing to address some aspects of the supply chain disruption.
How are different industries managing the disruption?
Pharmaceutical companies are sourcing more from local suppliers and are having the same material from different sources approved and compliant from different pharmacopeia (US, European and Japanese). FDA also mandates multiple suppliers for critical products.
Logistics is a key industry delivering goods. In these times where the inter state and country borders are shut, delivering goods and services is a challenge. Leveraging technologies like drones for contactless delivery is now becoming a reality.
The retail industry has adapted by leveraging e-commerce as their stores are being shut being on lock down. Only stores providing essential goods and services can be open. Even luxury retail is piggybacking on the e-commerce band wagon. LVMH are delivering via their online portal 24 Sevres. Patek Philippe which is among the most recognizable brands globally, are retailing their products through Watches of Switzerland, leveraging their online presence.
Supply Chain Disruptions and Contracts
Every business has supply contracts and one can safely assume that the performance of most supply contracts has been affected and/ or severely delayed due to the lockdown and sealing of interdistrict, inter-state and national borders. Payment receipts are also going to be an issue with suppliers and landlords as businesses have been shut and cash flows have taken a major hit. It is very likely that businesses may request their suppliers to extend the credit facility beyond the regular credit terms agreed. This is bound to have a cascading affect along the entire supply chain. There is news of an industry leader unilaterally deciding to extend credit terms enjoyed by them via an email to its suppliers.
This global pandemic can be construed to be a force majeure situation. Force majeure is a Latin term meaning superior event or an event beyond the control of a party to a contract. Many, but not all, contracts contain force majeure clauses, which permit suspension of performance of contractual obligations in case of unexpected events such as natural calamities or acts of God, civil war, government notifications/ acts/ orders, etc. Alternatively, there could be a material adverse event clause in your contracts.
Do your supply contract/s have force majeure or material adverse event clauses? The language of such clauses varies from contract to contract. Does the clause in your contract permit suspension of performance and/ or extension of time on account of the COVID-19 pandemic and/ or relieve you from the burden of performing any part thereof? Does the clause require you to send a notice to the other party to the contract?
If your contract does not contain a force majeure or material adverse event clause, you could still be relieved from the burden of performing your contractual obligations by relying upon the provisions of Indian contract law.
Similarly, most businesses lease commercial office spaces and / or warehouses. The lease agreements could contain clauses, which entitle the lessee to seek exemption from payment of lease rent in case of a force majeure event such as the COVID-19 pandemic and the consequent government orders declaring the prolonged lockdown. Many companies have already sent out notices to their landlords invoking the clauses in their lease agreements and sought to exempt themselves for payment of rent during the lockdown period. Have you reviewed your lease agreement?
Do you have insurance that covers at least a part of your risk that could happen in such an event? Wimbledon has a pandemic insurance which will ensure that they are covered for losses in excess of 100 million pounds
How can this risk be mitigated?
It is in times of crisis where these risks are realised and strategies around mitigating these risks comes into play. Eventually the success of these business is based on the success of the risks mitigated.
About the authors
Karthik Krishnamurthy is a seasoned supply chain professional who has managed various programs and has extensive consulting experience across various industries. Dharam Jumani is a Counsel practicing in the Bombay High Court, and in domestic and international arbitrations. He is a Fellow of the Chartered Institute of Arbitrators, U.K.